• Unit 7: Business Cycle Theory - II

    Unit 7 builds on Mises’ analysis of the business cycle by introducing the work of Professor Roger Garrison, who expanded on the work of Hayek in the 1930s and 1940s to build an excellent graphical exposition of the Austrian business cycle theory. In this unit, you will explore the theory in greater detail by looking at Garrison's presentation and discussing how saving through deferred consumption increases production.

    Completing this unit should take you approximately 2 hours.

    • Upon successful completion of this unit, you will be able to:

      • describe the Intertemporal structure of production and the Hayekian triangle;
      • explain how the lowering of time preference can lead to a higher level of investment;
      • describe how foregoing consumption in the short term will lead to more production in the long term; and
      • explain how the issuance of fiduciary credit can lead to overinvestment and overconsumption.

    • 7.1: Lecture

      • Lecture Page

        For many years, economists have pondered the causes of business cycles and how to deal with them. For example, Keynesian economists believe that recessions are a symptom of a lack of aggregate demand, and it is the government's prerogative to stimulate aggregate demand through spending, consumption, investment, and exports. In contrast to the Keynesian view, which emphasizes the importance of periods of recession, the Austrian view is that the expansionary period of the business cycle is the beginning of the business cycle. In this lecture, Saifedean looks at the different stages of production and how malinvestment can lead to a boom, overconsumption, unsustainable growth, and disturbances in the labor market.

        Topics covered include:

        • The issuance of fiduciary credit
        • The concept of the intertemporal structure of production
        • The relationship between an individual's time preference and their propensity to invest
        • The economic principle that involves deferring immediate consumption to foster greater production

        Key points:

        • There is a trade-off between consumption and investment
        • Saving through deferred consumption increases early-stage production
        • Overconsumption and overinvestment is unsustainable and inevitably leads to a bust
        • An increase in fiduciary media leads to overconsumption, overinvestment, and malinvestment

    • 7.2: Discussion

      • Discussion Page

        Since you have watched the video lecture for unit 7, it's time to watch Saifedean moderate a discussion on the unit's theme by addressing questions asked by your fellow classmates. As you watch the discussion unfold, take notes to help you retain information. Make sure you watch the entire discussion seminar video; otherwise, you may skip over important points. To get the best learning experience and mastery of the major concepts covered in this unit, you'll want to watch all videos in their entirety.

        Topics discussed include:

        • Debt vs. equity for financing
        • Other effects of fiat money on the economy
        • The futures market as seen through an Austrian lens
        • The correlation between savings rates and economic growth